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In recent years, microfinance has gained recognition as an effective tool for improving the quality
of life of poor people in india.

Micro Finance programmes extend small loans to poor people for their various needs such as
consumption, shelter, income generation and self-employment, etc. In some cases, micro ¿nance
programmes offer a combination of several services to their clients, in addition to credit (like
savings and insurance avenues, skill development training and marketing network.).

During the last decade, the sector has witnessed a sharp growth with the enterance of a number of
Micro Finance Institutions (MFIs) that are providing ¿nancial and non-¿nancial support to the
poor in order to uplift them.

Micro Finance movement in India is in rapid pace and has raised high expectations in the country
about the role that it can play in removing poverty and women empowerment.

This study showcases the signi¿cant contribution of the MFIs in India and also to understand and
appreciate the role that the MFIs can play, in improving the standard of living of the poor and the
underserved.

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This project has been taken up with the objective of

-‘ mtudying the Microfinance mector in India and the issues faced due to
the microfinance crisis in the year 2010.

-‘ ›lso a brief study on m m Microfinance .

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-‘ The scope of the study is identified after and during the study is
conducted.
-‘ The study is purely theoretical based.
-‘ Data on m m microfinance and malegam committee is based on certain
publications and reports from newspapers and other journals .

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ñ‘ The study is based on secondary data.

ñ‘ The secondary data is collected from various sources like journals,books ,reports for the
literature concerned.

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 is the provision of financial services to low-income clients or solidarity lending(it is
a lending practice where small groups borrow collectively and group members encourage one
another to repay. It is an important building block of microfinance.) groups including consumers
and the self-employed, who traditionally lack access to banking and related services.‘ More
broadly, it is a movement where the objective is "a world in which as many poor and near-poor
households as possible have permanent access to an appropriate range of high quality financial
services, including not just credit but also savings, insurance, and fund transfers.

Micro finance has become one of the most discussed subjects in the last two decades all over the
world. Today micro finance programs and institutions have become increasingly important
components of strategies to reduce poverty or promote micro and small enterprise development.
The Task Force on mupportive Policy and Regulatory Framework for Micro Finance has defined it
as under: ³Provision of thrift, credit and other financial services and products for very small
amounts to the poor in rural, semi-urban or urban areas for enables them to raise their income
levels and improve living standards´. Micro finance is a participative model that can address the
needs of the poor especially women members. It envisages the empowerment of the members by
promoting their saving habits and extending bank loans to them.

Robinson (2001) defines micro finance as ³small-scale financial services primarily credit and
savings-provided to people who farm, fish or herd´ and adds that it ³refer to all types of financial
services provided to low-income households and enterprises´. Micro finance is recognized and
accepted as one of the new development paradigms for alleviating poverty through social and
economic empowerment of the poor with special emphasis on empowering women. In India, micro
finance is generally understood but not clearly defined.

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It has been approximately 25 years since the birth of micro finance with the Founding of the
Grameen Bank in Bangladesh by Professor Mohammed Yunus. The field has since spread with the
adaptation and evolution of Prof. Yunus¶ ideas to various countries and context. The UN Year of
Micro Credit in 2005 indicated a turning point for micro finance as the private sector began to take
a more serious interest in what has been considered the domain of NGOs. The year has seen the
launch of a wide array of programmes throughout the UN system to raise public awareness about
micro credit and micro finance. Micro credit is a powerful economic tool, expected to transform
the social and economic life of the poor. The primary differentiator between micro finance and the
conventional credit disbursal mechanism lies in the ³join liability´ concept. › group of individual
(mostly women) get together to form an association. The groups in India, for instance are called
³melf Help Group´ (mHGs), all the members undergo a training programme based on the
requirements. The members of the mHG save regularly, to minimize the financial burden. There are
limits to the amount lent and the repayment is typically over 50 weeks.


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›ccording to international labor organization (ilo), #M
 
 
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In india, microfinance has been defined by ³the national microfinance taskforce, 1999´ as
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"The poor stay poor, not because they are lazy but because they have no access to capital."
The dictionary meaning of µfinance¶ is management of money. The management of money
denotes acquiring & using money. Micro Finance is a buzz word, used when financing for
micro entrepreneurs. Concept of micro finance is emerged in need of meeting special goal to
empower under-privileged class of society, women, and poor, downtrodden by natural reasons or

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men made; caste, creed, religion or otherwise.
The principles of Micro Finance are founded on the philosophy of cooperation and its central
values of equality, equity and mutual self-help. ›t the heart of these principles are the concept of
human development and the brotherhood of man expressed through people working together to
achieve a better life for themselves and their Children.
Traditionally micro finance was focused on providing a very standardized credit product. The
poor, just like anyone else, (in fact need like thirst) need a diverse range of financial instruments
to be able to build assets, stabilize consumption and protect themselves against risks. Thus, we
see a broadening of the concept of micro finance--- our current challenge is to find efficient and
reliable ways of providing a richer menu of micro finance products. Micro Finance is not merely
extending credit, but extending credit to those who require most for their and family¶s survival. It
cannot be measured in term of quantity, but due weightage to quality measurement. How credit
availed is used to survive and grow with limited means.

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The typical micro finance clients are low-income persons that do not have access to formal
Financial institutions. Micro finance clients are typically self-employed, often household-based
entrepreneurs. In rural areas, they are usually small farmers and others who are engaged in small
income-generating activities such as food processing and petty trade. In urban areas, micro
finance activities are more diverse and include shopkeepers, service providers, artisans, street
vendors, etc. Micro finance clients are poor and vulnerable non-poor who have a relatively
unstable source of income.
›ccess to conventional formal financial institutions, for many reasons, is inversely related to
income: the poorer you are, the less likely that you have access. On the other hand, the chances
are that, the poorer you are, the more expensive or onerous informal financial arrangements.
Moreover, informal arrangements may not suitably meet certain financial service needs or may
exclude you anyway. Individuals in this excluded and under-served market segment are the
clients of micro finance.
›s we broaden the notion of the types services micro finance encompasses, the potential

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market of micro finance clients also expands. It depends on local conditions and political
climate, activeness of cooperatives, mHG & NGO¶s and support mechanism. For instance, micro
credit might have a far more limited market scope than say a more diversified range of financial
services, which includes various types of savings products, payment and remittance services, and
arious insurance products. For example, many very poor farmers may not really wish to borrow,
but rather, would like a safer place to save the proceeds from their harvest as these are consumed
over several months by the requirements of daily living. Central government in India has
established a strong & extensive link between N›B›RD (National Bank for ›griculture & Rural
development), mtate Cooperative Bank, District Cooperative Banks, Primary ›griculture &
marketing mocieties at national, state, district and village level.

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ñ‘ India is said to be the home of one third of the world¶s poor; official estimates range from
26 to 50 percent of the more than one billion population.
ñ‘ ›bout 87 percent of the poorest households do not have access to credit.
ñ‘ The demand for microcredit has been estimated at up to $30 billion; the supply is less than
$2.2 billion combined by all involved in the sector.
Due to the sheer size of the population living in poverty, India is strategically significant in the
Global efforts to alleviate poverty and to achieve the Millennium Development Goal of halving
the world¶s poverty by 2015. Microfinance has been present in India in one form or another
since the 1970s and is now widely accepted as an effective poverty alleviation strategy. Over
the last five years, the microfinance industry has achieved significant growth in part due to the
participation of commercial banks. Despite this growth, the poverty situation in India continues
to be challenging.

mome principles that summarize a century and a half of development practice were encapsulated
in 2004 by Consultative Group to ›ssist the Poor (CG›P) and endorsed by the Group of Eight

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leaders at the G8 mummit on June 10, 2004:
ñ‘ Poor people need not just loans but also savings, insurance and money transfer services.
ñ‘ Microfinance must be useful to poor households: helping them raise income, build up
assets and/or cushion themselves against external shocks.
ñ‘ ³Microfinance can pay for itself.´ mubsidies from donors and government are scarce and
uncertain, and so to reach large numbers of poor people, microfinance must pay for itself.
ñ‘ Microfinance means building permanent local institutions.
ñ‘ Microfinance also means integrating the financial needs of poor people into a country¶s
mainstream financial system.
ñ‘ ³The job of government is to enable financial services, not to provide them.´
ñ‘ ³Donor funds should complement private capital, not compete with it.´
ñ‘ ³The key bottleneck is the shortage of strong institutions and managers.´ Donors should
focus on capacity building.
ñ‘ Interest rate ceilings hurt poor people by preventing microfinance institutions from
covering their costs, which chokes off the supply of credit.
ñ‘ Microfinance institutions should measure and disclose their performance- both financially
and socially.
Microfinance can also be distinguished from charity. It is better to provide grants to families
who are destitute, or so poor they are unlikely to be able to generate the cash flow required to
repay a loan. This situation can occur for example, in a war zone or after a natural disaster.


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›lthough neither of the terms microcredit or microfinance were used in the academic literature nor
by development aid practitioners before the 1980s or 1990s, respectively, the concept of providing
financial services to low income people is much older.
While the emergence of informal financial institutions in Nigeria dates back to the 15th century,
they were first established in Europe during the 18th century as a response to the enormous
increase in poverty since the end of the extended European wars (1618 ± 1648). In 1720 the first
loan fund targeting poor people was founded in Ireland by the author Jonathan mwift. ›fter a
special law was passed in 1823, which allowed charity institutions to become formal financial
intermediaries a loan fund board was established in 1836 and a big boom was initiated. Their
outreach peaked just before the government introduced a cap on interest rates in 1843. ›t this time,
they provided financial services to almost 20% of Irish households. The credit cooperatives created
in Germany in 1847 by Friedrich Wilhelem Raiffeisen served 1.4 million people by 1910.
He stated that the main objectives of these cooperatives ³should be to control the use made of
money for economic improvements, and to improve the moral and physical values of people and
also, their will to act by themselves.´ In the 1880s the British controlled government of Madras in
mouth India, tried to use the German experience to address poverty which resulted in more than
nine million poor Indians belonging to credit cooperatives by 1946. During this same time the
Dutch colonial administrators constructed a cooperative rural banking system in Indonesia based
on the Raiffeisen model which eventually became Bank Rakyat Indonesia (BRI), now known as
the largest MFI in the world.





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In the 1970s a paradigm shift started to take place. The failure of subsidized government or
Donor driven institutions to meet the demand for financial services in developing countries let to
several new approaches. mome of the most prominent ones are presented below.
Bank Dagan Bali (BDB) was established in meptember 1970 to serve low income people in
Indonesia without any subsidies and is now ³well-known as the earliest bank to institute
Commercial microfinance´. While this is not true with regard to the achievements made in
Europe during the 19th century, it still can be seen as a turning point with an ever increasing
Impact on the view of politicians and development aid practitioners throughout the world. In
1973 ›CCION International, a United mtates of ›merica (Um›) based non governmental
Organization (NGO) disbursed its first loan in Brazil and in 1974 Professor Muhammad Yunus
started what later became known as the Grameen Bank by lending a total of $27 to 42 people in
Bangladesh. One year later the melf-Employed Women¶s ›ssociation started to provide loans of
about $1.5 to poor women in India. ›lthough the latter examples still were subsidized projects,
they used a more business oriented approach and showed the world that poor people can be good
credit risks with repayment rates exceeding 95%, even if the interest rate charged is higher than
that of traditional banks. ›nother milestone was the transformation of BRI starting in 1984. Once a
loss making institution channeling government subsidized credits to inhabitants of rural Indonesia
it is now the largest MFI in the world, being profitable even during the ›sian financial crisis of
1997 ± 1998.
In February 1997 more than 2,900 policymakers, microfinance practitioners and representatives of
various educational institutions and donor agencies from 137 different countries gathered in
Washington D.C. for the first Micro Credit mummit. This was the start of a nine year long
campaign to reach 100 million of the world poorest households with credit for self employment by
2005. ›ccording to the Microcredit mummit Campaign Report 67,606,080 clients have been

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reached through 2527 mfis by the end of 2002, with 41,594,778 of them being amongst the poorest
before they took their first loan. mince the campaign started the average annual growth rate in
reaching clients has been almost 40 percent. If it has continued at that speed more than 100 million
people will have access to microcredit by now and by the end of 2005 the goal of the microcredit
summit campaign would be reached. ›s the president of the World Bank James Wolfensohn has
pointed out, providing financial services to 100 million of the poorest households means helping as
many as 500 ± 600 million poor people.

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ñ‘ Micro Finance movement has gained momentum mainly in the mouthern mtates which have
a better socio-economic scenario due to gender-inclusiveness of cultural traditions and rich
natural resource.

ñ‘ MFIs generally serve rural clients (75 per cent clients). The proportion of rural clients
under mHG, Grameen, Individual Banking and mector-speci¿ c MFIs is 67 per cent, 86 per
cent, 72 per cent and 100 per cent respectively.(this is as per the data produced by mIDBI in
one of its study in 2008)
ñ‘ The percentage of households reporting their main source of income as agriculture, animal
husbandry and non-farm activities went up, whereas, those reporting casual labour and
others went down. The ¿shing activity and salaried income did not register any signi¿cant
change.








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 !"It is a small amount of money loaned to a client by a bank or other institution.
Microcredit can be offered, often without collateral, to an individual or through group lending.
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ñ‘ ›vailable at door step
ñ‘ ·ess paper work
ñ‘ No middlemen involvement
ñ‘ Easily accessible

-+,-These are deposit services that allow one to save small amounts of money
forfuture use. Often without minimum balance requirements, these savings accounts allow
households to save in order to meet unexpected expenses and plan for future expensesa‘
‘+,--. / 0"". 1/ 
The reasons for preference of saving scheme by women were :
ñ‘ They can maintain savings at their door steps.
ñ‘ They can create emergency funds which acts as a security at their odd times.
ñ‘ They were able to save small amounts on regular basis which was not possible in any
formal ¿nancial institution.
ñ‘ They can contribute to their family or near and dear ones during distress.

-2 It is a system by which people, businesses and other organizations make a
payment to share risk. ›ccess to insurance enables entrepreneurs to concentrate more on
developing their businesses while mitigating other risks affecting property, health or the ability to
work.

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/"" -These are transfer of funds from people in one place to people in another, usually
across borders to family and friends. Compared with other sources of capital that can fluctuate
depending on the political or economic climate, remittances are a relatively steady source of funds.

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Though the importance of microfinance in the process of poverty eradication is realized, it faces
multiple problems. Offering financial services to the poor individual is a complex process and
that in itself leads to various challenges.

ñ‘ . 34-05"6" /7 "05 55" 55-

Microfinance clients are either very small businesses or poor individuals who usually have few
assets, non-existent credit histories, and low income levels. This is a problem because it means
these clients cannot offer any collateral to microfinance providers against loans. ›s a result,
microfinance institutes (MFIs) may either raise their interest rates (which are already high for
small loan transactions) or turn down hundreds of applications .

ñ‘ -""2"5+05"6/ " 3- -


Poorly constructed business ideas with a lack of consideration of demand and costs render the
micro venture unsustainable, and microfinance may incorrectly get the blame for it. For instance,
in the case of micro crop farming, farmers often fail to account for their personal consumption
between the sowing and harvesting periods and realize they face a shortage of money.

›s a result, they often end up using the loan for personal matters. The problem arises when its time
to pay back the loan ± the farmer is forced to take up a second loan to pay the original loan. This
may lead to a vicious cycle where the farmer gets flooded with debt.

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ñ‘ 7715 !, 02"/ - + -

Many micro entrepreneurs live in far off rural areas, often remote villages, and have little formal
education which lead to two issues:

-‘ a lack of knowledge about the existence of financial services for the

poor, (solution ± financial literacy campaigns)

-‘ little access to microfinance services offered by MFIs.



ñ‘ .", 5
3"58-55"

›s a result of the above three problems, a fourth problem arises for micro entrepreneurs ± a lack of
funds. Without credit, the micro ventures may not grow or quickly take advantage of opportunities.
mince, 20% of the world¶s population accounts for 86% of consumption (Global Issues Website),
one can deduce that the problem isn¶t related to the shortage, but rather, mis-allocation of funds.

ñ‘  1,9"5 -2 -!3,+  


Micro entrepreneurs have limited skills, qualifications and exposure to handle businesses. While
they need to be trained, many micro entrepreneurs may not grow as planned because of these
problems.

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For instance, they may borrow more money than needed, or misuse it in their business and end up
bearing the burden of large interest payments instead of enjoying the fruits of their business.



ñ‘ 25 05"6" /., -

Micro entrepreneurs are particularly susceptible to sudden changes in customer demand, or the
weather because their businesses cannot sustain losses owning to their small size (low capital).
This may be a problem for the social objectives of microfinance providers but MFIs ensure their
economic performance is untarnished by charging high interest rates to compensate this risk.






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One of the major problem faced by the poor households are lack of adequate income and capital to
assist them in several risky situations like major illness,natural calamities, accidents etc.
Devicing suitable products and services as per the needs of the poor household is amajor challenge
faced by microfinance institutions.
ñ‘
5 !-" -- :

The MFI had tried to assist them in situations like serious illness or death of the bread earner etc to
the extent possible. However, the major problem with many MFIs is shortage of resources to
adequately meet the loan requirements of the members/clients . Consequently, the capability of
many MFIs to increase the income of the clients was restricted, so was their ability to help them in
distress. s. Even so, the MFIs have been striving to help their clients in risk situations as a result of
which there is increased resilience in the vulnerable categories of clients

---"  05 -1!1"3 1".". .55 , -5 - -"2!6

mmt. Poorani and her husband lived together with their three children. They possessed 2.50 acres
of agricultural land and earned their livelihood by cultivating the land and working on a brick kiln
seasonally. Her husband, who was a cloth merchant also visited nearby villages for sales. During
his sales visits, he developed unlawful relations with women and contracted the fatal illness, ›IDm
and since then, ill health constantly pestered him. mmt. Poorani left no stone unturned, seeking
medical help and spent all her savings on her husband¶s treatment. Finally, she sold the brick-kiln
for Rs. 25,000 and spent the entire amount on his medical treatment as she earnestly wished her
husband to be cured completely. With renewed confidence and hope, she approached the group
leader of the mHG, who immediately sanctioned her a loan of Rs. 20,000 for his medical treatment.
But, it was of little use, as her husband ¿nally passed away, leaving her to fend for herself and her
three children. Having failed to save her husband, Poorani did not become bitter but took on the

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onus and responsibility of looking after her home and her children. With the balance amount of Rs.
10,000, she started dairy activity, further utilising two MFI loans of Rs. 5000 and Rs. 4800 for
cultivation of commercial crops like onion, groundnut and paddy. Her income gradually increased,
both from the dairy activity and the cloth business, with assured food security from her agricultural
land. mhe asserted that, but for the timely MFI assistance and counseling, she would not have been
able to cross the various hurdles and challenges of bringing up her children single-handedly and
develop strategies for coping with it.

25!,
-5  1".-2 

There is an increase in the proportion of households with insurance. There is a much greater scope
for popularising insurance as an anti-vulnerability measure. Microinsurance is specifically
designed for the protection of low -income people, withaffordable insurance products to help them
cope with and recover from common ris ks. It is amarket-based mechanism that promises to
support sustainable livelihoods by empowering peopleto adapt and withstand stress.

"255/"6+, !23/, " 3- - -"2!6

mmt. Poonam and her family were solely dependent on the sale proceeds of the produce of their
orchard having expanse of ¿ve bighas and producing guava. mhe had to borrow money from
private sources at an very high rate of 48 to 60 per cent towards the cost of agricultural inputs and
maintenance of the orchard and thereby had to spend out a huge chunk of the sale proceeds for
repayment of the loan. More so, there was no assurance of getting loan in time.

mubsequently,Poonam became a member of the group and borrowed a sum of Rs. 5,000 for
investment in the orchard. Consequently, the income of the family went up due to lesser burden on
account of interest payment. Being encouraged, she further availed of another loan of Rs. 10,000
the next year and utilised it for purchase of insecticide and arranging for irrigation, but the orchard
was washed away and completely devastated by the excessive release of water from the Ganga

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Barrage due to Àood in the upper reaches. Not having been covered by insurance, the family had
again gone back to a pitiable condition and was confronted with the problem of repayment of loan.

1,-
-7"2"
Risk borrowings comprise borrowings for the following
purposes:
(i) ·ifecycle events (mainly marriage)
(ii) Debt redemption
(iii) Emergency house repair
(iv) Medical costs
(v) Emergency food needs.
The proportion of households borrowing for risk went down across all wealth ranks. . ›vailability
of loans from MFIs could partly explain the higher proportion of client households borrowing for
risk purposes.

"02"
-"56/52 -:
;"
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The dependence of the households for risk borrowing from CIm, mainly moneylenders, reduced
after receiving increased credit support from MFIs. The proportion of client households borrowing
from Costly Informal mources for risk purposes declined sharply from 36.5 per cent to 23.9 per
cent.


-701,061/ <. ! !.2- .5!-

Micro ¿ nance emerged as a valuable source of risk borrowing for two of the most vulnerable
sections of the poor households, i.e. µwomen sole earner¶ and µwomen earning along with men¶.
However, covariate risks were often beyond the powers of the MFIs to overcome and needed
intervention of Governments at various levels.
 .05"" -!, ""051/- -"2!6
mmt. Poleramma, an illiterate scheduled tribe woman earned her livelihood, since childhood,
by selling iron scrap. ·ater, she married a man engaged in the same activity, but found it

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extremely dif¿ cult to support her family consisting of three sons and three daughters and
resorted to begging for food and clothes. However, to make both ends meet, she began
knitting/weaving bamboo baskets and selling them but found that the income was meagre.
On hearing about the MFI, she joined the group and took the ¿ rst loan of Rs. 4,000 and started a
scrap shop. mhe cleared the loan and availed of eight successive loans and utilised themas follows:
the second loan of Rs. 10,000 for investment in business, the third loan of Rs.
15,000 for purchasing a kutccha house, the fourth loan of Rs. 50,000 to clear all outside debts, the
¿fth of Rs. 60,000 for investing in hair-selling business, the sixth loan of Rs. 70,000 to purchase 10
mobile carts, the seventh loan of Rs. 1,00,000 to again clear debts, the eighth loan of Rs. 3,50,000
to construct a pucca house and the ninth loan of Rs. 2,50,000 was utilised for iron scrap business.

There was a complete metamorphosis in the life of Poleramma ± from almost a beggar to a woman
of substance - an entrepreneur and busy woman engaged in multiple business activities. ›s an
entrepreneur, Poleramma headed her business activities and was also the leader of the group.
mubsequently, she got all her six children married and got her three sons involved in her business
activities. Poleramma¶s case proved that MFI credit enabled a very poor woman µliving a hand to
mouth existence¶ to become an entrepreneur, leading a highly successful life.











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3.1 Definition of women empowerment :

Naila abeer defines women¶s empowerment as the process by which those who have been denied
the ability to make strategic life choices acquire such ability. This ability to exercise choices
incorporates three inter-related dimensions: resources which include access to and future claims to
both material and social resources; agency which includes the process of decision-making,
negotiation, deception and manipulation; and achievements that are the well-being outcomes.

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›lthough men, as well as women, face difficulties in establishing an additional enterprise, women
have barriers to overcome. ›mong them are negative socio-cultural attitudes, legal barriers,
practical external barriers, lack of education and personal difficulties.

In spite of this, for women and especially for poor women, micro-enterprise ownership has
emerged as a strategy for economical survival. One of the most essential factors contributing to
success in micro-entrepreneurship is access to capital and financial services. For various reasons,
women have had less access to these services than men.

In this context, credit for micro-enterprise development has been a crucial issue over the past two
decades. Research has shown that investing in women offers the most effective means to improve
health, nutrition, hygiene, and educational standards for families and consequently for the whole of
society. Thus, a special support for women in both financial and non-financial services is
necessary.

Regarding limited-access to financial services, women depend largely on their own limited cash
resources or, in some cases, loans from extended family members for investment capital. mmaller
amounts of investment capital effectively limit women to a narrow range of low-return activities

^

which require minimal capital outlays, few tools and equipment and rely on farm produce or
inexpensive raw materials.

In general, women need access to small loans (especially for working capital), innovative forms of
collateral, frequent repayment schedules more appropriate to the cash flows of their enterprises,
simpler application procedures and improved access to saving accounts.

murveys have shown that many elements contribute to make it more difficult for women in small
businesses to make a profit. These elements are:

ñ‘ ·ack of knowledge of the market and potential profitability, thus making the
choice of business difficult.
ñ‘ Inadequate bookkeeping.
ñ‘ Employment of too many relatives which increases social pressure to share
benefits.
ñ‘ metting prices arbitrarily.
ñ‘ ·ack of capital.
ñ‘ High interest rates.
ñ‘ Inventory and inflation accounting is never undertaken.
ñ‘ Credit policies that can gradually run their business (many customers cannot
pay cash; on the other hand, suppliers are very harsh towards women).

Traditionally women have been marginalised. › high percentage of women are among the poorest
of the poor. Microfinance activities can give them a means to climb out of poverty. Microfinance
could be a solution to help them to extend their horizon and offer them social recognition and
empowerment.

On the other hand, thank to women's capabilities to combine productive and reproductive roles in
microfinance activities and society has enabled them to produce a greater impact as they will

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increase at the same time the quality of life of the women micro-entrepreneur and also of her
family.

mhort-term assistance programmes might aim at increasing the productivity of women's labour by
providing credit, technology, and skill training. ·ong-term objectives could emphasise eliminating
institutional constraints which limit women's access to productive resources, creating social,
technological, and economic mechanisms to reduce conflicts between women's productive and
reproductive roles, as well as defining strategies to address traditional and legal barriers that
hamper or preclude the active participation of women in the productive sectors of the economy.

The key issue for successful micro finance program focused on women should consider them in a
broader context, as a family nucleus, that is vital for societal improvement and progress. Following
this idea, micro finance programmes should provide women with specific adapted products
through appropriate methodologies, which can offer competitiveness to their business but also well
being to them and their families.

It is difficult to say which factors are more important for empowering women. The differences in
pace of empowerment might be a result of various factors: household and village characteristics,
cultural and religious norms within the society, behavioral differences between the respondents
and their family members; and the kind of training and awareness programs that women have been
exposed to.

For mHG programs, the results seem to indicate that the minimalist microfinance approach is not
sufficient. ›dditional services like training, awareness raising workshops and other activities over
and above microfinance programs that merely focus on financial services are also an important
determinant of the degree of its impact on the empowerment process of women. Future research
needs to identify which factors in mHG programs have a greater impact on women¶s
empowerment.





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m m stands for mwayam rishi mangam, which in Hindi means ´self-cultivation society.´ Dr.
Vikram ›kula, Founder and Chairperson, founded m m in 1997 and launched operations in 1998
in ›ndhra Pradesh, India with the mission to eradicate poverty. In 1996-97, while still a PhD
graduate student, ›kula raised $52,000 in seed funding from 357 family members and friends to
start m m as a non-profit organization. In 2005, m m converted into a non-banking financial
company (NBFC) which is regulated by India¶s central bank, the Reserve Bank of India (RBI).

their core business is distributing income generation and productivity loans that begin at Rs. 4,000
to poor women so they can start and expand simple businesses and increase their incomes. Their
micro-enterprises range from raising cows and goats in order to sell their milk, to opening a village
tea stall. m m does not distribute consumer loans to buy, for example, gold, televisions or clothing.

m m also distributes and administers micro-insurance to the poor as well as financing for other
goods and services that can help them combat poverty.

Its customers :

m m offers loansonly to poor women in India who typically make less than $2 a day when they
join as borrowers. The majority of m m customers are in rural India, across 19 states. ·oan officers
assess whether potential borrowers fall below the poverty line.

m m uses the joint liability group lending model where women guarantee each other¶s loans. Over
three days, borrowers undergo financial literacy training and must pass a test before they canapply
for loan. m m approves new loans based on initial screening ofthe applicant and approval of the
other members in the group. Weekly meetings with borrowers in their villages follow a highly
disciplined approach. Re-payment rates on our collateral-free loans are more than 99% because of
this systematic process.

There are three reasons why m m lends only to women. Women tend to use resources more
productively than men; they are more likely to invest most of their income back into the
household; and they are more likely to avoid risky ventures and instead use loans to undertake
small, manageable activities. Women have demonstrated themselves to be excellent microfinance

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customers. By providing loans to women, m m expects to see a rise in household income that
benefits the entire family.


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Through its distribution network, m m also distributes and administers micro-insurance to the poor
as well as financing for other goods and services that can help them fight poverty. We work with
Indian insurer Bajaj ›llianz to offer life insurance to our borrowers, and with Nokia and ›irtel to
help borrowers finance mobile phones. m m is working with Metro, the German wholesaler, to
help finance quality inventory for the small shops of our borrowers so poor people can access
quality goods at lower prices. We are piloting housing loans with technology and financial
assistance from HDFC and have also piloted financing of water purifiers and solar lamps.
The non-profit m m mociety (http://www.sksngo.org/), supports and trains the ³ultra poor´ -- the
destitute and disabled who cannot participate in mainstream microfinance. It is also working on a
campaign to distribute deworming tablets to Indian children to rid them of intestinal worms, in
partnership with Deworm the World, a global non-profit.m m educational society runs a network
of budget rural elementary schools that cater to the children of low-income people.

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Initial funding for m m came from a variety of individual donors who were family and friends of
the founder. mubsequently, development organizations and angel investors supported m m.
Grameen Foundation matched an early awardand Friends of Women¶s World Banking extended a
loan when m m was a non-profit. Other early investors included Vinod hosla, co-founder of mun
Microsystems, as well as the mmall Industries Development Bank of India (mIDBI).

Today, m m has transactions with over 40 financial institutions. Its debt partners include Indian
public sector banks like mtate Bank of India, Corporation Bank, Industrial Development Bank of

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India (IDBI), Bank of India, Indian Overseas Bank; private sector banks like HDFC, ICICI, ›xis,
IndusInd, arurVysya, mouth Indian Bank, Yes Bank and multi-national banks like Citi, ›BN
›mro, BNP Paribas, mtandard Chartered, Barclays, HmBC, ING Vysya among others.


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m m microfinance charge an interest rate of 24.55% per annum across India.

›t face value, these rates may seem high but it is expensive to distribute micro-loans, which is
why many conventional banks don¶t do it themselves.

In India, government regulations prohibit microfinance institutions from accepting savings

deposits. Therefore, we have to borrow funds from commercial banks to on-lend to our customers.
Banks typically charge us 11-14% interest to borrow funds.

Next, their loan officers must travel to remote rural villages by motorbike and manually distribute
loans and collect payments from our women borrowers at their doorstep each week. This is a
labor-intensive and costly process.

›t m m, re-payment rates are more than 99%. For many poor people, their only option for
financial services is a local moneylender who can charge rates as high as 40%-70% or more.

Borrowers can comfortably repay because when they start a micro-business -- whether selling
vegetables or raising livestock -- their return on investment (ROI) is very high, This is because
they have low overhead costs, no tax or legal costs, and are able to quickly increase their incomes
with even a small amount of start-up capital.

Even if a poor person has access to a rural bank, they have to pay transportation costs to reach the
branch and often lose wages because of the time spent traveling from village to bank. Considering
these factors, the cost of a bank loan, or ³total cost of borrowing´, is higher than its stated interest
rate.

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m m hopes to lower interest rates and has already done so in states where we have reduced our cost
of operations. We have urged the Indian government to allow banking via mobile phones and we
recommend that microfinance institutions be allowed to accept savings. These kinds of policy
reforms would bring down the cost of microfinance loans and allow m m to pass savings on to
borrowers by lowering interest rates.

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There are many measures in hand to protect the interest of the client.‘

‘They first require potential members to take financial literacy training and pass a test over three
days to demonstrate they understand interest rates, loan installments, and re-payment schedules.
They make small loans exclusively for income-generating activities, not for consumption. They
lend only to women who borrow in interdependent groups of five. Women tend to be more careful
with their use of loans than men.

Their loan officers have never been incentivized by collection rates or the size of loans disbursed.
m m emphasizes fair loan collection practices when we train loan officers. We condemn strong-
arm collection practices.

m m is committed to transparency on interest rates. ·oan officers disclose interest rates to potential
borrowers and we print this information in the m m passbooks carried by each customer.

m m has also taken the lead on transparency and code of conduct initiatives, such as the global
mmart Campaign launched in 2009 by the Center for Financial Inclusion in Washington.

m m is also part of MFIN, a new microfinance industry association launched in India in early
2010. MFIN has adopted a self-regulatory code of conduct, which includes limiting borrowers¶
group loan sizes to less than Rs. 50,000 total from three microfinance institutions; sharing data
with credit bureaus; and a whistleblower policy on code of conduct violations, among other

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guidelines. MFIN has also pledged investment of Rs. 2 crore to set up a new microfinance credit
bureau, which aims to check over-indebtedness and multiple borrowing.



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m m has identified the barriers to scaling microfinance ± what it calls the 3 Cs of Capital, Capacity
and Costs ± and has taken an innovative approach to overcome these barriers. These three
principles, using a profit-oriented model, drawing on best practices from the business world for
scaling and using technology have helped us create a new generation of microfinance institution
and enabled us to reach numbers that otherwise the microfinance sector has not seen before.

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Many believe that microfinance should be a ³social business´, meaning investors should
get their investment back but no profits. m m has a different view. If the microfinance
industry is going to provide the estimated INR 2,399.35 billion (UmD 51.4 billion) of credit
needed by the poor, it must tap commercial capital markets ± and that means structuring
microfinance so that investors can expect a return on their investment. That is why m m
converted from a non-profit NGO to a ±profit Non-Banking Financial Company (NBFC) ±
regulated by the Reserve Bank of India ± in 2005.


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With rapid scaling comes the challenge of building organisational capacity. Rather than
look at conventional microfinance models, m m based its business strategy on principles
borrowed from fast-scaling consumer businesses. m m standardised its products and front-
line processes and adopted factory-style training models that have helped corporate giants
scale up rapidly ± thereby boosting our own workforce capabilities and growth.

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m m Microfinance firmly believes that technology is one of the key enablers for scaling
microfinance. For m m, technology is an investment that is adding value to what and how
we offer financial solutions to our members. m m Microfinance is among the first to
develop and deploy an industry standard MF technology platform in-house, delivering
superior value to our end customers. The systems designed and deployed at m m have
enabled the business to grow rapidly since its simple to use, saves time, is accurate and
allows for data highlights to be transferred to head office when needed. m m is now
investing in putting up a robust IT backbone with a world class data backup centre
delivering mission critical services and connectivity across our branch offices to manage
the next phase of growth. The new agile and scalable technology architecture is capable of
handling the challenges specific to the microfinance sector. › web-based Business
Intelligence portal using state-of-art technology and a highly flexible and scalable platform
has also been deployed to support the business growth and operations.

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ñ‘ 2403 branches across 19 states .
ñ‘ Total member base stands at 7.7 million
ñ‘ Gross ·oan portfolio increased to Rs. 5,028 crores including assigned loans of Rs. 266
crores
ñ‘ Networth of Rs. 1,845 crores and cash & bank balances of Rs. 398 crores as at 31st
December, 2010.
ñ‘ Management expects the earlier issued guidance of revenue and profit to change with a
downward bias, the final outcome of which is dependent upon collection efficiency in
›ndhra Pradesh.
ñ‘ Reduced Interest Rates across India to 24.55% w.e.f. 11th January 2011 for all future
disbursements. There will be no collection of charges towards credit shield and loan

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 processing fees for new loans for the rest of FY11. The pricing policy for FY12 will be
reviewed in line with final guideline by RBI based on Malegam committee
recommendations.
ñ‘ Incremental credit limits sanction of Rs.1,500 crs. received in Q3-FY11 and total of
Rs.2,722 crores of sanctions as on 31st December, 2010
ñ‘ mtarted Gold loan pilot in 5 branches

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ñ‘ Expertise in microfinance
ñ‘ Diversified - mources of revenue, product offerings, geographies
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m m Microfinance, a for-profit, publicly traded microfinance institution (MFI) based in India,

recently reported total income of INR 3.85 billion (UmD 83.8 million) and a 38 percent drop in
net profit to INR 341 million (UmD 7.4 million) for the period October-December 2010. › 30-
percent fall in the share price of m m has also been recorded since October 2010 [1].

During this period, m m boosted its loan loss provision to INR 1 billion (UmD 21.7 million)
from INR 116 million (UmD 2.5 million) during the same quarter in the previous year.
›pproximately INR 587 million (UmD 12.7 million) of this provision is allocated to the ›ndhra
Pradesh loan portfolio, and INR 269 million (UmD 5.8 million) has been provisioned per
guidelines released by the Reserve Bank of India (RBI) in response to the turmoil in
microfinance that began in ›ndhra Pradesh in October 2010. It is unclear if the RBI-inspired
sum is a subset of or separate from the INR 587 million figure.

›ccording to 2010 data from the Microfinance Information Exchange (MIX), the microfinance
information clearinghouse, m m Microfinance reported total assets of UmD 1.2 billion, a gross
loan portfolio of UmD 1.2 billion, approximately 6.6 million borrowers, return on assets (RO›)
of 6.3 percent and return on equity (ROE) of 22.4 percent.

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In 2005±2006 one of ›ndhra Pradesh¶s 23 administrative districts experienced a crisis when the
district government closed 50 branches of four MFIs following allegations of unethical
collections, illegal operational practices (such as taking savings), poor governance, high interest
rates, and profiteering.On that occasion, the dispute was calmed by the MFIs agreeing to abide
by a Code of Conduct alongside support from the national government and the Reserve Bank of
India (RBI), which recognized the useful role MFIs played in providing credit for low-income
households.

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 But a rivalry between competing MFI and mHG models for serving the poor, often reaching into
the same villages, has been simmering ever since. The m m initial public offering (IPO) earlier
this year highlighted both the enormous scale potential of the MFI model and the considerable
opportunity it provides to improve financial inclusion, while at the same time highlighting
potential high profits and lavish executive compensation.

The press picked up on the m m IPO, with different media outlets taking different angles on the
story. Further reports over the summer cited links between MFI practices and some suicides in
›ndhra Pradesh. The situation came to a head in early October when ›ndhra Pradesh¶s chief
minister passed ³›n Ordinance to protect the women melf Help Groups from exploitation by the
Micro Finance Institutions in the mtate of ›ndhra Pradesh,´ which sought to place a range of
new conditions on MFIs, including district-by-district registration, requirements to make
collections near local government premises,a shift to monthly repayment schedules, and other
measures that affect how MFIs operate. This ordinance has contributed to a general
environment where MFI ground-level operations are impeded, and loan collections for MFIs in
›ndhra Pradesh dropped dramatically.

In the face of low loan collections, MFIs with proportionally larger exposures in ›ndhra
Pradesh could find it difficult to refinance their loans with commercial banks or to raise new
equity. MFIs unable to effectively negotiate their financing could become illiquid and insolvent.
Even MFIs that are well capitalized and have a geographically diversified portfolio beyond
›ndhra Pradesh might have to absorb large losses in ›ndhra Pradesh, impacting their growth
elsewhere. It is possible that a few MFIs might have to close or dramatically downscale their
operations in ›ndhra Pradesh. ›nd the result could be the removal of a credit service that poor
people have come to view as reliable in their otherwise uncertain lives.

mtakeholders outside ›ndhra Pradesh have also reacted to the conflict between the state
government and MFIs, and the intense media coverage. Though it has not made any public
statements to date, RBI, the regulator of NBFC MFIs, has formed a subcommittee tasked with

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looking into a wide range of microfinance issues nationally, including a re-examination of MFI
loans¶ classification as priority sector lending. The Ministry of Finance
has supported the continued presence and value of MFIs while at the same time it has pushed for
improved MFI practices, lower interest rates, and stricter regulation. The financial markets have
taken notice, m m¶s share price dropped steeply, and it is unlikely there will be follow-on MFI
IPOs very soon in the current environment.
In recent years, the levels of profitability and private gain have caused political concerns and have
exposed issues of reputation management for an industry whose very existence is based on doing
good by serving poor people. The potential for large returns made by the promoters of MFIs and
their investors²vividly illustrated by the headlines about the m m IPO from late July onwards²
has served to exacerbate the issue of interest rate levels, which are a chronic political and public
relations flashpoint.
Going forward, the microfinance industry as a whole needs to be serious about implementing a
responsible finance agenda, including transparency about interest rates charged to clients. Before
the crisis, the MFIs had already begun a process that will lead them to report their interest rates
publicly early next year through a third party, Microfinance Transparency.
In 2009 the MFIs had decided to invest in a credit bureau. Though it might take some time to be
fully functional, the credit bureau will be important to help MFIs lend more responsibly. merious
discussion is underway about new regulations for the microfinance industry, both to help ensure
that acceptable standards are met but also to create regulatory certainty for MFIs, and about
deepening MFI relationships with clients by providing a range of financial products instead of
relying heavily on small-group loans.








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The Reserve Bank of India in October 2010 set up a mub-Committee of its Central Board of
Directors to study the issues and concerns in microfinance sector, under the Chairmanship of mhri
Y H Malegam, a senior member on the Reserve Bank¶s Central Board of Directors. Other
members of the mub-Committee included mhri umar Mangalam Birla, Dr. C Chakrabarty,
Deputy Governor, mmt. mhashi Rajagopalan and Prof. U R Rao. mhri V mharma, Executive
Director, Reserve Bank of India was the Member mecretary to the mub-Committee.

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The Reserve Bank of India released on 19TH J›N 2011 on its website the Report of the RBI mub-
Committee of its Central Board of Directors to study Issues and concerns in the micro finance
institutions (MFI) mector.

The mub-Committee has recommended creation of a separate category of NBFCs operating in the
microfinance sector to be designated as NBFC-MFIs. To qualify as a NBFC-MFI, the mub-
Committee has stated that the NBFC should be ³a company which provides financial services pre-
dominantly to low-income borrowers, with loans of small amounts, for short-terms, on unsecured
basis, mainly for income-generating activities, with repayment schedules which are more frequent
than those normally stipulated by commercial banks´ and which further satisfies the regulations
specified in that behalf.

The mub-Committee has also recommended some additional qualifications for NBFC to be
classified as NBFC-MFI. These are:

a. The NBFC-MFI will hold not less than 90% of its total assets (other than cash and bank balances
and money market instruments) in the form of qualifying assets.

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b. There are limits of an annual family income of Rs.50,000 and an individual ceiling on loans to
a single borrower of Rs.25,000

c. Not less than 75% of the loans given by the MFI should be for income-generating purposes.

d. There is a restriction on the other services to be provided by the MFI which has to be in
accordance with the type of service and the maximum percentage of total income as may be
prescribed.

The mub-Committee has recommended that bank lending to NBFCs which qualify as NBFC-MFIs
will be entitled to ³priority lending´ status. With regard to the interest chargeable to the borrower,
the mub-Committee has recommended an average ³margin cap´ of 10 per cent for MFIs having a
loan portfolio of Rs. 100 crore and of 12 per cent for smaller MFIs and a cap of 24% for interest on
individual loans. It has also proposed that, in the interest of transparency, an MFI can levy only
three charges, namely, (a) processing fee (b) interest and (c) insurance charge.

The mub-committee has made a number of recommendations to mitigate the problems of multiple-
lending, over borrowing, ghost borrowers and coercive methods of recovery. These include :

a. › borrower can be a member of only one melf-Help Group (mHG) or a Joint ·iability Group
(J·G)

b. Not more than two MFIs can lend to a single borrower

c. There should be a minimum period of moratorium between the disbursement of loan and the
commencement of recovery

d. The tenure of the loan must vary with its amount

e. › Credit Information Bureau has to be established

f. The primary responsibility for avoidance of coercive methods of recovery must lie with the MFI
and its management

g. The Reserve Bank must prepare a draft Customer Protection Code to be adopted by all MFIs

h. There must be grievance redressal procedures and establishment of ombudsmen

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For monitoring compliance with regulations, the mub-Committee has proposed a four-pillar
approach with the responsibility being shared by (a) MFI (b) industry associations (c) banks and
(d) the Reserve Bank.

While reviewing the proposed Micro Finance (Development and Regulation) Bill 2010, the mub-
Committee has recommended that entities governed by the proposed ›ct should not be allowed to
do business of providing thrift services. It has also suggested that NBFC-MFIs should be exempted
from the mtate Money ·ending ›cts and also that if the recommendations of the mub-Committee
are accepted, the need for the ›ndhra Pradesh Micro Finance Institutions (Regulation of Money
·ending) ›ct will not survive.

The mub-Committee has cautioned that while recognising the need to protect borrowers, it is also
necessary to recognise that if the recovery culture is adversely affected and the free flow of funds
in the system interrupted, the ultimate sufferers will be the borrowers themselves as the flow of
fresh funds to the microfinance sector will inevitably be reduced.

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ñ‘ There should be proper regulation as the area in which the MFI¶m operate in is different
from the area of commercial banks and other lending bodies.

ñ‘ ³The ultimate objective of MFIs is to ensure financial inclusion and not making profit. mo
long as they work towards this objective, they are microfinance companies and when they

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 start looking at profit they become loan-sharks or commercial entities´- Muhammad
Yunus, the Bangladeshi Nobel laureate who brought revolutionary changes in the micro-
credit area in his country, has opined that the best service the profit-oriented MFIs like m m
could do to the sector is to stop calling themselves as micro-financiers as they are nothing
but "loan-sharks". mo this criticism need to be resolved.

ñ‘ The recommendations given by Malegam Committee is excellent and the government

should take atmost care in accepting the same. ›lready in ›ndhra Pradesh, local money
lenders have increased their interest rate and are taking the advantage, to protect and safe
guard the rural borrowers, Malegam committee report has to be accepted by the
Government of India and ›ndhra Pradesh Micro Finance Institutions Money ·ending ›ct
has to be completely scrapped in the interest of the rural borrowers. But it has got certain
limitations too like 

-‘ The Committee¶s recommendations on interest rate caps and margin caps are still being
debated.

-‘ The margin-based pricing policy is interesting but could lead to some skewed results.

-‘ The Committee¶s recommendation that MFIs should not levy an insurance administration
charge is difficult to justify. There is a real expense involved in negotiating and arranging
insurance, and paying premiums to the insurance company
ñ‘ Provide flexibility to MFIs to design their products around appropriate tenure, loan
amounts, and interest rates, while retaining measures that protect borrowers.

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› good microfinance program exhibits an attractive combination of the quality, depth, cost,
breadth, length and variety of outreach. Progress in microfinance does allow improvements in one‘
dimension of outreach without deterioration of another dimension. Indeed there are serious gaps
between the current achievements and potential supply. Reducing the gap between current

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